The Enterprise System Spectator

Wednesday, April 29, 2009

Enterprise software vendor R&D investments declining

Enterprise software vendors such as SAP, Oracle, Lawson, and others often argue that their maintenance revenues are essential in funding their R&D efforts. These ensure that their products are kept current with new technologies and customer investments in their systems are preserved.

But Jason Carter just blew a hole in that argument. He calculates a new metric: R&D spending as a percentage of maintenance revenue. His calculations show that for SAP, Oracle, Lawson, and Epicor, R&D spending as a ratio to maintenance revenue has actually declined since 2001. (He also reports on Sage, but the results are confusing because of how Sage reports its financials.)

Further thought: The vendors' argument in defense of maintenance revenue makes no sense.

First, they argue that their maintenance revenue is needed to fund their new development. But Jason's findings show that R&D as a percentage of maintenance revenues are declining. So much for that rationale.

Second, it is without a doubt that recurring maintenance revenues are the way that Oracle and SAP, among others, have been funding their acquisition programs. But most of the functionality acquired by SAP and Oracle is not available freely to existing customers. For example, SAP does not make Business Objects products freely available to SAP customers. So customers pay twice: first to fund the vendors' acquisition programs, and then again if they want to use those acquired products.

SAP postpones its maintenance fee price hike

Well, well, well. SAP announced today that it is deferring its scheduled increase in maintenance fees. The price hike, from 17% to 22% of software license fees was scheduled to kick in as SAP moved all of its customers to its high-end Enterprise Support program.

The rationale provided by SAP is that it has not yet met the improvements in key performance indicators that it worked out with its user group executive network to "measure and verify the ongoing value of SAP Enterprise Support." My understanding was that these measures should have already been reported.

Still, SAP has good reason to back-pedal:

Current economic conditions are no time to be raising prices for customers. Due to the vendor lock-in effect, SAP might get away with it short-term, but at the risk of long term customer relationships.

SAP was already forced in December to let its customers in Germany and Austria stay on on their current maintenance contracts through 2009. This was a crack in the dike, as so to speak as customers in other geographies wonder why they should be different from Germany and Austria.

Other customers have been exercising contract rights to limit maintenance fee increases. I know of at least one customer here in Southern California who was thrilled to discover that his consultant had negotiated such a limit in his original contract.

In the larger picture, there are growing signs that some providers, especially the SaaS vendors, see excessive maintenance fees as an opportunity to adopt a low-price-leader strategy, something that is long overdue in the enterprise software industry.

My guess is that SAP is looking for a way to soften or modify its forced-march toward one-size-fits-all Enterprise Support. I don't know what the answer is, but I'm hoping it provides greater flexibility and choice.

Dennis Howlett gives his take. He writes, "I’m convinced SAP had no choice but to take these steps as a way of mollifying a very unhappy and increasingly vocal customer group. Even so, it is good to see that SAP has finally bent to the inevitable and now has an opportunity to put this fiasco behind it."

Tuesday, April 28, 2009

Enterprise software: who wants to be the low-cost leader?

As enterprise software matures as an industry, why haven't we yet seen a major player competing on the basis of lowest cost? If anything, the major players--SAP and Oracle--seem to be moving in the opposite direction, raising maintenance fees and pursuing even higher margins.

SaaS as One Answer
As I wrote in the previous post, Attacking and defending software vendor maintenance fees, I think this situation is unsustainable in terms of the economics. I also listed several possible market responses to this situation, including the rise of software-as-a-service providers to provide a low-cost alternative.

Then today, I received a confirmation: Chris Kanaracus at Computerworld emailed me the latest missive from Marc Benioff, CEO of Salesforce.com. It's supposedly an email to his management team, but Chris received it from Benioff's PR group, so the audience is clearly the general public.

Benioff writes,

It's time for The End of Maintenance. Every year, companies spend billions on maintenance fees and get relatively little in return. Maintenance fees cover updates that are mostly patches and fixes, but they stop far short of the kind of innovation every that enterprise needs to survive. Companies pay to keep the past working and they end up doubling down on technology that can never keep up with their needs. The fees that companies pay have actually been rising, from something like 17% a few years ago to numbers more like 22% today. Every four or five years, companies are paying for their software all over again.

Benioff is right to take this approach. A large part of the so-called investment that traditional on-premise software vendors, such as SAP and Oracle, make in product development does not go toward new products or new functionality. Rather it goes into porting and regression testing every product change against myriad combinations of databases, versions, server and desktop OS releases, middleware, third-party products, and other platform components. SaaS vendors avoid many of these costs as they write to a single platform: their own. Therefore, they ought to be able to deliver the same functionality for lower cost. In other words, they have a natural cost advantage that they can exploit in competing with traditional on-premise software vendors.

And this does not take into consideration the fact that SAP and Oracle are realizing gross margins somewhere in the neighborhood of 90% on their software maintenance revenue. It would seem that beating these guys on the basis of price should be a pretty easy target.

Disruption of a low-cost strategy
As industries mature, the basis of competition generally moves to price. In fact, there are really only two strategic alternatives for a business: low-cost leader and differentiation (everything else). For example, in retailing, Wal-Mart competes as the low-cost leader. Wal-Mart's entire business model is designed to give it a cost-advantage, resulting in its ability to be the low-cost leader.

Nordstrom, on the other hand, competes on the basis of being different, mainly on the basis of customer service. Nordstrom's entire operation is organized to give excellent customer service.

Today, nearly all of the traditional software vendors compete on the basis of their products being better, and therefore commanding a higher price--either the initial license fee, or more commonly, high annual maintenance fees. But these days it is difficult to differentiate SAP, Oracle, or other vendors on the basis of functionality. In many ERP vendor selections, the leading enterprise software products can check all the boxes—so where is the differentiation?

Perhaps the large vendors think they can be the Nordstrom of enterprise software. If so, they should learn from Nordstrom, as it is difficult to find any buyer that would describe the customer service experience of enterprise software vendors to be "excellent."

So, the time may be right--especially in light of current economic conditions--for some vendors, especially the SaaS providers, to come out and use their inherent cost advantage to compete on price.

If Marc Benioff wants to take the lead, more power to him.

Side note: as I'm writing this, I see Dennis Howlett is making a similar point, about open source business apps gaining ground due to their lower cost. "Low-cost leader" may not sound like the place where enterprise software providers would want to be. But there's nothing special about business applications: as the industry matures, cost must become a dominant element of competition.

And, Dennis Howlett points out that open source CRM SaaS provider SugarCRM just announced a price cut yesterday. It's a long post, worth reading, as Dennis goes into the economic advantage that SugarCRM is enjoying. This very much confirms my point that we may very well be entering into a phase where some enterprise software providers can succeed with a low-cost-leader strategy. Read: Sugar CRM reduces prices across the board, looking for broad adoption.

Now Vinnie points out that SAP has announced a postponement of its maintenance price hike. Maybe SAP is finally seeing that raising maintenance fees is an untenable position, especially in this economy.

And be sure to read the comments on this post, as there is much good discussion.

Friday, April 24, 2009

Attacking and defending software vendor maintenance fees

Conversations in the so-called blogosphere can be hard to follow sometimes, and there's an interesting one going on the subject of vendor maintenance fees.

The short version: on my previous post on the Lawson CUE conference, I had one point regarding a dialog that several of us had with Lawson executives regarding Lawson's maintenance program.

Paul Wallis commented on the post, expressing the view that vendors need to do a better job defending their maintenance programs, and pointed to one of his own blog posts where he elaborated in more depth, concerning SAP's maintenance fee hike.

Vinnie Mirchandani then responded on his own blog.

Anyway, if you want to follow along, read the following posts in sequence:

My post on Lawson's CUE. Read the section headed, "Touchy on Subject of Maintenance Fees" as well as Paul's comment at the bottom of the post.

My take: I'm with Vinnie on this one. The balance of power between software vendors and customers has tipped too far to the side of vendors. This is what many of us feared when the software vendor consolidation trend heated up with Oracle's takeover of PeopleSoft. The escalation of maintenance fees is just one symptom. I am a believer in free enterprise, and I believe that ultimately the economics of the current situation are unsustainable.

Wednesday, April 22, 2009

Insights from Lawson CUE 2009

Lawson invited me to attend its annual conference in San Diego this week. I last attended Lawson's CUE in 2005, so this was a good opportunity to catch up on the latest with this vendor of enterprise software. It was also a chance to spend some time with like-minded bloggers such as Vinnie Mirchandani and Michael Krigsman. And by like-minded I mean those that write from the perspective of technology-buyers.

Here are some of the points that to me were most meaningful, from discussions with Lawson executives and customers as well as from dialog in the analyst meetings. I'll try to comment beyond what is in the announcements and press releases.Lawson Refining Its Vertical Industry Focus
Dean Hager, the Lawson executive in charge of product management, laid out what I thought was a coherent rationale for Lawson's current industry focus. I've always been a fan of industry-focused strategies, and I like Lawson's identification of narrow sub-sectors that offer growth. For example, Lawson's M3 (the former Intentia product) has been, for some time, focused on the fashion industry, among other sectors.

But Dean pointed out that Lawson is targeting not fashion manufacturers per se, but rather organizations where the focus is on fashion design, sourcing, and distribution. As much apparel production has been outsourced to low-cost locations, such as China and India, the greatest opportunity for Lawson is not in manufacturing but in these higher value links in the supply chain.

Likewise, Lawson's M3 has always been strong among equipment manufacturers. But rather than focus on this entire sector, Lawson is targeting firms that sell and service or rent their equipment, since the most profitable segment is the aftermarket sub-sector.

One challenge facing Lawson is in differentiating itself from the two largest enterprise software vendors: SAP and Oracle. Lawson is unlikely to beat either of these players in total application software sales. But by adopting a strategy of targeting narrow verticals it is quite reasonable for Lawson to seek to dominate them. Dean quotes the work of Geoffrey Moore along these lines, and I agree. The strategy is right. Whether Lawson will be successful in execution is the real test, of course.

Technology Update
At CUE 2005, I spent some time learning about the new Lawson System Foundation (LSF), with its Landmark design tools. So now, four years later, I was interested to learn what progress Lawson had made. Here, the word was encouraging, with 90% of S3 customers and 400 M3 customers reportedly taken delivery of the latest versions under LSF.

I was also encouraged about plans to roll out use of Lawson's development toolset, Lawson Application Designer (LAD), to partners and even customers. Lawson's professional services group has already been building some LAD-based apps as custom development for select customers. The next step will be to roll out to this capability to partners, with the goal of expanding the ecosystem of software developers around Lawson. I feel this move is really key, as a core enterprise system vendor, such as Lawson, can only be successful if there are many other parties surrounding it that have a way to make money supporting Lawson. Lawson simply does not have the global or even national scale to reach every opportunity: only by making itself attractive to VARs and other local service providers will it be able to leverage its investment in its core products.

Smart Office and Enterprise Search
Dean Hager spent a good part of his keynote demonstrating Lawson's new user interface, dubbed Smart Office, and the new enterprise search capability. Smart Office is essentially a Windows desktop that holds a number of "widgets" tailored according to the user's job or "role." Lawson gives you a starting set of widgets for typical roles, but you can then tailor them further. The whole look-and-feel is Vista-like. The product shows extremely well.

I notice that vendors like to demo the user interface. It's something that's easy to show and also something that everyone in the audience can understand. That's not the case if the vendor tried to show functionality: for example, improvements in calculation of available-to-promise or how drop-ship orders can be tracked.

User interface features may grab the attention of prospects, but ultimately they are not essential to success. I know of no ERP implementation that failed because user interface wasn't slick enough. On the other hand, I have seen plenty of ERP implementations that floundered because functionality did not work as expected.

Still, I must admit, Lawson's new Smart Office is pretty slick. I was told by someone closer to the action, however, that there are few if any implementations outside of Lawson's beta sites. Hopefully that will change, as new prospects buy it and plan for it as part of greenfield implementations.

The new Enterprise Search capability also looks promising. Built on top of the open source Apache Lucine software, it allows users to quickly find all occurrences of key data in Lawson data structures, regardless of the file or format. For example, if there is another "peanut scare," a food manufacturer could find all places where a certain peanut product was referenced, whether in purchase requisitions, customer orders, manufacturing records, or bills-of-material. The capability can also extend to non-Lawson data, such as data on the user's own desktop.

I like features like this, which blur the line between ERP data and other enterprise information. Few organizations have all of their enterprise data in their ERP systems. Whether customers will be willing to let Lawson be the hub for enterprise search is an open question, but Lawson is making a good move to try. I also like that Lawson is building this capability on open source technology.

Touchy on Subject of Maintenance Fees
CEO Harry Debes spoke in his keynote about Lawson's new Value Improvement Program (VIP) for software maintenance. The program allows customers to fix maintenance costs for three years and extends maintenance for discontinued products. In addition, there are new maintenance offerings to improve incident response time, extend hours of coverage, provide better resolution of critical issues, and give a single point of contact for the customer. The goal, according to Debes, is to increase value to the customer without increasing cost.

Software maintenance costs are a subject of keen interest to some of us, so during the analyst meeting afterwards with Dean Hager, Dennis Howlett (via Internet) asked something to the effect of whether Lawson was prepared to work with customers to reduce maintenance costs. Dean thought for a moment and then said, essentially, no. His answer was that, in order to serve customers, it is important for Lawson to be financially healthy and maintenance revenues are a part of Lawson's financial health (I'm paraphrasing here). Others followed up with questions regarding the value that customers receive for their maintenance dollars. To both, Dean repeated essentially the same point, that Lawson would not cut maintenance fees. I then attempted to give Dean an out by asking whether Lawson's offer of tiered maintenance (Bronze and Silver) was in fact a way to give customers flexibility in how much they wanted to pay. But Dean didn't take the out and again repeated that Lawson would not cut maintenance fees.

I found the entire exchange to be odd. The only explanation I can come up with is that, with a number of financial analysts in the room, Lawson finds it important to reassure Wall Street that its maintenance revenue stream is not threatened. A couple of us later checked with Lawson's PR group concerning pricing for Lawson's two tiers and found that Silver is priced annually at 22% of software license cost, while Bronze is just a two point discount, at 20%. We were underwhelmed, to say the least.

Is it just coincidental that the 22% number is exactly the same as Oracle's and also the same as SAP's new one-size-fits-all enterprise support?

SAP is getting quite a bit of resistance from its customers worldwide, who resent being put on a forced march to unbudgeted-for maintenance increases. Now it appears that Lawson is heading down the same path: arguing that the increased costs are justified by the better value of its VIP program. Ultimately, it is customers that will need to decide whether the increased costs are justified. I would just like to see some vendor try a different approach and really attempt to compete on lower costs and flexibility in maintenance programs.

Thanks to Lawson, though, for giving us a forum to ask these questions.

Customer Experiences
Lawson arranged for me to interview two M3 customers, without PR folks present, which I appreciate. I always learn something from speaking with customers, and this was no exception. From Shahi Exports in the apparel sector, an installed M3 customer of three years, I learned that current economic conditions are putting strains on planning systems. Customers are holding orders until the last minute, giving planners little time to determine resource availability. This would likely be a problem regardless of the system and many apparel manufacturers are turning to point solutions to solve the problem. I also heard about challenges in localizations for international markets, always an issue for vendors that want to sell worldwide.

I also spoke with Jeff Greenway, of Washingon-based Bargreen Ellingson, which is just seven weeks into a new M3 implementation. It was good to hear that Lawson is able to make new sales in this economy. (A check with a friend who works for Lawson confirmed that there are new M3 deals closing in several key verticals.) For a mid-size business, Bargreen Elligson appears to be well-positioned for success, with a full-time core team of eight, several full-time M3 consultants, and a reasonable timetable for go-live. Jeff outlined his project plan and approach at a high level and assuming the effort is successful, it should make a good case study.

Monday, April 20, 2009

Oracle to buy Sun: mixed news for customers

Oracle has stepped in to buy Sun, and Sun's board agreed this morning, nearly ensuring the deal with go through. The total deal value is $5.6 billion.

Oracle's move looks good for Oracle. It now gives Oracle pieces of the entire technology stack, including hardware, which it formerly lacked. It also gives Oracle a lesser but important player in the operating system market: Sun's Solaris. Historically, Solaris has been the primary OS on which Oracle deployed its database and applications software, though in recent years, Oracle has positioned Linux as its preferred OS (as a low-cost platform, Linux allowed Oracle to save more of the customer's budget for its own products). Oracle also gets mySQL, the leading open source database, which Sun acquired a couple of years ago. But most importantly, I think, Oracle now gets ownership of Sun's Java, one of the leading programming languages.

Whether Oracle's move is good for enterprise buyers generally is another question, and here there is a mixed picture.

First, Oracle now commands a larger percentage of the IT budget in many organizations, especially large companies. Although there may be some small benefit in CIOs having fewer vendors to deal with, many organizations have been trying recently to reduce their total spend with Oracle, not increase it, as Oracle has shown itself to be particularly aggressive in maintaining and increasing its maintenance revenue. Having a larger share of the customer's budget only strengthens its position of power over the customer.

Second, Oracle's ownership of mySQL is particularly troublesome, as it competes with Oracle's database at the low end. Don't expect Oracle to make the sorts of investments needed in mySQL to allow it to move up market where it will be more of a threat. I was much more comfortable with Sun's ownership of mySQL, as Sun could be seen as having an interest in investing in it. I doubt Oracle will kill mySQL outright, as it does give Oracle an entre into small businesses. But rather I see Oracle limiting it to applications where it doesn't compete with its own database offering. Oracle has been deeply involved in the open source movement, with its heavy commitment to Linux development. On the other hand, Linux does not compete with any of Oracle's own products, as mySQL does, or could if given adequate resources.

The factor that is a bit more difficult to evaluate is Java, a leading software development language and SOA framework that Sun invented and recently moved to an open source license. On the one hand, Oracle has deeper pockets than Sun and may be in a better position to promote it. On the other hand, it spreads Oracle's influence further into the R&D efforts of many other organizations, many of which are already writing to Oracle's database and middleware offerings.

However, our research at Computer Economics shows Java lagging Microsoft's .NET recently, especially in smaller organizations. I seriously doubt that Oracle is thrilled with the outlook of Microsoft's .NET being the dominant framework for SOA development. So, maybe Oracle will put a more concerted effort in strengthening Java as a platform. If this turns out to be the case, Oracle's acquisition of Sun could have a silver lining.

Update, Apr. 22: As usual, Bruce Richardson has good insight. He thinks Oracle will immediately sell off Sun's hardware business but will keep mySQL viable but in a minor role.

More from Josh Greenbaum: head-spinning speculation on IBM actually favoring Oracle's takeover of Sun and the threat this poses for SAP, which might be motivated to revive talks of a merger with Microsoft.

Michael Fauscette reports on his conversation with Oracle's co-President Charles Phillips and what Michael thinks the prospects are for Oracle's use of Sun's hardware expertise in Oracle's nascent appliance business. He is also more optimistic than most concerning the outlook for mySQL.

Thursday, April 16, 2009

Another wave of Oracle layoffs, April 2009

I just noticed a surge in web traffic from Google referrals for "Oracle layoff" and "Oracle layoffs, April 2009," and a quick check with LayoffBlog is showing many new comments yesterday and today indicating that another wave of layoffs is occurred on April 15-16.

The comments indicate that the reduction in force (RIF) is primarily impacting consulting and support groups in the U.S. and Canada, with some comments from overseas locations as well. The Orlando support center is mentioned several times. No mention of the development organization being impacted.

Layoffs hitting the support group would be unfortunate, as Oracle has been boasting in its financial announcement of the fat margins it realizes from its maintenance revenue. But there are already reports of customer dissatisfaction with Oracle's aggressive attempts increase revenues from its installed base. Therefore, one might argue that Oracle should be increasing its service and support resources, not cutting them. Otherwise, it increases the risk of a major customer backlash in the future. As Rick Aster pointed out in a blog post this morning, don't confuse customer patience with customer satisfaction.

As has been the case in previous waves of Oracle layoffs, there is no announcement or press notice from Oracle directly. If you have more information, please drop me an email or leave a comment on this post.

Update, Apr. 27. Over the past several days, there have been a number of hits to the Spectator looking for information on Oracle severance packages. If you have information on why this subject is suddenly of interest, please drop me an email or leave a comment on this post.

I'm interested in hearing about best practices, lessons learned, horror stories, and case studies of success or failure.

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